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6 Crucial Factors That Affect Personal Loan Interest Rates

Are you interested in taking out a personal loan? Many people require such financing tools when remodeling their homes, consolidating previous debts, or planning to purchase a new vehicle.

While researching lenders, it’s paramount for borrowers to compare their offers in terms of interest rates. These rates are likely to range from a minimum of 3, 5 % to a maximum of 36 %, depending on a myriad of criteria lenders take into account, such as the credit score, employment status, education, and debt-to-income ratio of borrowers.

Nowadays, most lenders provide an online lånekalkulator for potential clients to estimate the interest rates on personal loans.

The following factors are considered to be most crucial in the determination of such rates.

Credit score

The credit score of borrowers is unquestionably the most significant factor for lenders to take into account when reviewing personal loan applications. Therefore, potential applicants are strongly advised to check their credit reports for errors that might reduce their score and affect the fulfillment of eligibility criteria.

Upon discovering an error in the reports, it’s paramount to resolve the issue with the credit reporting company. These errors are usually resolved over a longer time period, hence requiring you to check the reports at the onset of the application process.

Moreover, the credit score is a representation of one’s creditworthiness, which is predominantly determined by the FICO (Fair Isaac Corporation) scoring model, composed of five essential components. The primary component that lenders check is the repayment history of borrowers that constitutes 35 % of the entire FICO score.

In order for your history to be considered impeccable, you are expected to have paid for all loans, non-debt obligations, and utility bills in a timely manner, over a seven-year period. Keep in mind that one missing payment is enough for the FICO score to be lower.

Credit utilization is another important component that comprises 30% of the FICO score. It’s calculated by dividing your credit card balance by your credit limit, followed by multiplying the sum by 100 so as to get the ratio. In order for lenders to consider you eligible, your credit utilization ratio isn’t supposed to exceed fifty percent. Click here for a better understanding of credit utilization and the way it affects your score.

The following component that constitutes 15 % of the FICO score is the credit history length of borrowers, referring to the time period of having an account opened. Every account that you’ve opened more than six months ago is considered valuable to your history length, particularly the older ones. Therefore, it’s important not to close your old accounts, regardless of the activity.

The credit mix is yet another vital component of the FICO score that accounts for as much as ten percent. This factor refers to the various types of accounts that comprise one’s credit report, such as mortgages, auto loans, credit cards, etc. Bear in mind that fixed-rate loans are considered to be of lower risk than the ones whose interest rates are variable.

The ultimate factor that affects borrowers’ FICO score is the application for new loans. The fewer new loans you apply for, the higher your new credit rank. In a nutshell, lower interest rates are assigned to borrowers with a high FICO score, between 740 and 850 points. The lower the score the higher the interest rates, particularly in the case of subprime borrowers whose score is below 619.

Employment status

Another indispensable factor that affects interest rates is the employment status and income of borrowers. In order for a borrower to get lower interest rates on a loan, he/ she is supposed to be employed in a traditional manner, not being self-employed or a freelancer. Also, the ones that have recently opened a small business are considered less eligible by lenders.

In terms of income, lenders prefer high-income borrowers who earn a minimum of $20,000, while low-income applicants can only qualify for high-interest rates. Nevertheless, freelance income isn’t considered reliable enough to help borrowers qualify for low-interest rates, regardless of how ample the income is.

Debt-to-income ratio

The debt-to-income ratio is known to be one of the most crucial factors that affect interest rates. In order to calculate this ratio, lenders divide the debt obligations of borrowers by their overall income. Not all obligations affect the debt-to-income ratio, like the utility payments.

Nevertheless, almost all installment loans are considered debt obligations, particularly mortgages. Not all lenders have uniform requirements when it comes to debt-to-income ratio, but lower ratios are known to be more beneficial for getting low-interest rates.

Loan term and principal

The term and principal of the loan you apply for play a major role in the calculation of interest rates. Long-term loans, between five and seven years, are characteristics of the high-interest rates, whereas the short-term ones, between one and three years, have lower rates.

In terms of principal, high-principal loans come with high-interest rates due to their high-risk nature. Nevertheless, lenders consider most of the borrowers ineligible for such offers, only approving them to qualified applicants.


Collateral is yet another indispensable factor that affects interest rates, referring to the assets that the borrower is obliged to forfeit in the event of not being able to pay the loan off. Consequently, secured credits have lower interest rates when compared to the unsecured ones, because the former involves a lower level of risk for lenders. Anyhow, keep in mind that virtually all personal loans are unsecured, thus having a higher interest.


Not all lenders consider the conventional credit score factors most crucial in the determination of interest. Most of the alternative lenders emphasize the importance of education and employment, hence providing educated borrowers with prospective careers with low interest, regardless of their overall qualifications.

Bottom line

Each of the above-mentioned factors is vital in terms of getting a favorable personal loan.

Make sure you check everything thoroughly prior to the application process to avoid unexpected surprises!